March 31, 2014 marked the initial publication of Michael Lewis’s book, Flash Boys, which pulled back the curtain on the phenomenon of high-frequency trading in the U.S. equity market. The practice, through which investment firms are potentially able to front-run rivals targeting the same trades, has been criticized for enabling a financial market that’s tilted against the average investor.
The NEO Exchange was launched just under a year later. Aside from levelling the playing field for investors without a technological speed advantage, the exchange promises fairer trading conditions by improving access to and lowering costs of real-time market data on securities, along with programs to help enhance liquidity and visibility for public companies.
NEO’s mission to create a fairer and more accessible investing arena didn’t end there. NEO Connect, launched in 2016 and enhanced in March 2017, allows OM- and prospectus-based funds to be traded simply and efficiently through a platform-traded fund (PTF) format. And in October, NEO announced the launch of DealSquare, a digital platform focused on improving access to other private-market opportunities in Canada, beyond the OM-based funds.
“Globally, the amount of assets invested in private markets — which includes private equity, venture capital, growth capital, private debt, and real assets — is close to US$6 trillion,” Jos Schmitt, president and CEO of NEO, told Wealth Professional. “If you focus on North America, and private equity only, we’re looking at amounts in excess of US$1 trillion.”
The gargantuan size of the private market, Schmitt said, came as it handily outgrew the public equity space. Since the turn of the century, he estimated that AUM in the private equity space has increased sevenfold, compared to public stock market assets which have doubled.
“This is driven by a clear view that private markets today are not just a source of better yields, but also an important element to portfolio diversification,” he added. While private equity firms have returned about 13% over the last 25 years, the S&P 500 has returned approximately 9% over the same period.
He also noted a growing tendency for companies to prefer private financing and wait much longer before considering the public option. The past decade has brought about a marked decline in public-market listings, with the number of TSX-listed firms decreasing by 35% since 2008 amid a slowdown in IPOs, increased M&A activity, and companies increasingly going private.
While the growth of private markets has been inexorable, access to the investing opportunities and the attendant benefits has been largely confined to large institutions and family offices.
“I believe that is wrong,” Schmitt said. “It is creating further inequity in our society, which is bad in itself but ultimately will also negatively impact our economy. And that’s where DealSquare comes in.”
Bringing together the NEO Connect back-end technology with the Silver Maple Ventures front-end technology, DealSquare allows investment advisors to easily invest in private placement offerings for their accredited investor clients: they can find the deals on a centralized online marketplace, the subscription process will be digitized and automated, and the exempt securities will be seamlessly integrated into client accounts and back office systems upon close. Because a lot of the processes have been automated and placed on-book, the platform substantially reduces the costs and risks associated with buying private assets.
From the perspective of capital-raisers, and their dealers, the DealSquare platform allows them to present any type of private deal to the investment community, whether it relates to a public corporation, a private firm, or real assets, and whether it is shares, debt or fund units. Smaller and mid-sized companies stand to particularly benefit from DealSquare; rather than being pushed to go public on a stock exchange before they are ready to do so, they now have an alternative to access private capital from investors who may be interested.
“Our objective is to get most Canadian investment dealers and their advisors connected to this platform,” Schmitt said. “We are looking at over 100 dealers and close to 10,000 advisors.”
Things are certainly off to a good start. A handful of early adopters, including Aligned Capital Partners and AMUR Financial Group, are already on board. Initial feedback has also been very positive from advisors who agree that the traditional process of investing in private markets has been costly and inefficient. Dealers, meanwhile, are also interested in broadening their distribution in a centralized fashion, as they typically have had to reach out to a fragmented base of potential investors.
Schmitt also shared a vision of an even bolder future — one in which private assets can grace the portfolios of smaller retail investors who aren’t accredited.
“We’d like to explore the possibility of leveraging certain exemptions, such as those one might find with crowdfunding,” he said. “When people who do not work with an investment advisor can invest in private assets within the protections of an appropriate regulatory framework — that’s ultimately what we think a democratized private market should look like.”
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